The Providence American
Dated: Saturday, 02/10/2007
By Adriana I. Dawson
RI Small Business Development Center
Regional Director, Pawtucket & Central Falls
In the past few years, large credit providers have been lining up to launch business credit cards designed specifically for small-business owners . While these offerings prove the strength of the small-business segment within the U.S. economy, entrepreneurs as a group are still considered underserved by the credit industry.
With all the efforts being made to tailor credit cards specifically for entrepreneurs, why is the small-business community still considered underserved by credit providers?
It's because so many small-business owners continue to use personal credit cards for their business expenses, rather than using business credit cards. Historically, it's been easier for people starting companies to use cards they've already established in their own names, rather than apply for a card in the company name. They are unaware of how critical building and managing their business credit is to the success of their businesses.
What's the practical difference between a personal card and a business credit card?
The processes for establishing the amount of open credit for the account and the interest rate are completely different. For the credit provider, they're looking at personal credit history vs. business credit history, though some applications for business credit cards will also take your personal credit history into account.
But more and more, we're seeing major banks make lending and credit decisions using automated processes, which look only at business credit. And as local banks continue to be purchased by larger,
national banks, I think we'll see business credit records becoming increasingly important.
Why wouldn't an entrepreneur want to use her personal credit accounts to start up a company? What's the advantage to using a business credit card?
The major advantage is that when you open a business credit account, make purchases with it, and then pay them on time, you're establishing business credit in your company name. And, as I said, business credit records are becoming more important for all kinds of financial decisions.
How does a startup company get a first credit card?
For a brand-new business, a credit provider will probably start by examining your personal credit history. Generally they'll also default you to a higher interest rate and a lower credit threshold until your company proves itself. The important thing to remember is that after six months of good history with them, you can go back and renegotiate your credit terms.
How should a small-business owner choose a credit card for his company?
Start by talking to your local bank, especially if you already have a business account established there. If you've been a good customer, they may be able to issue you a business card. Ask your accountant and other entrepreneurs for referrals.
How could an entrepreneur try to get a better credit-card interest rate than the one that's offered to the general public?
Small-business owners should start by understanding how credit-card interest rates are established. Many banks establish interest rates through an automated decision process that involves set algorithms, especially for smaller accounts. Those that have poor credit ratings can pay interest rates twice those of companies with good credit ratings.
So, even if small businesses don't have an immediate need to pay on credit, it is a good idea for them to apply for and use a credit card. Using it and paying it on time builds up their good credit history, just like with a personal card. Also, most small businesses have cash-flow challenges, and a credit card can help them bridge this gap if
and when the need arises.
Source: Karen E. Klein, Business Week Online, September 8, 2006
Volume No.: 21